Summary of WESTMORELAND COAL CO

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Forward-Looking Information
Throughout this Form 10-Q, we make statements, including estimates, projections, statements relating to our business plans, objectives and expected operating results that are "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These forward-looking statements generally are identified by the words "believe," "project," "expect," "anticipate," "estimate," "intend," "strategy," "future," "opportunity," "plan," "may," "should," "will," "would," "will be," "will continue," "will likely result," and similar expressions. Forward-looking statements are based on current expectations and assumptions that are subject to risks and uncertainties, which may cause actual results to differ materially from the forward-looking statements. A detailed discussion of these and other risks and uncertainties that could cause actual results and events to differ materially from such forward-looking statements is included in the section entitled Risk Factors (refer to Part I, Item 1A in our 2008 Form 10-K and see Part II, Item 1A below). Specific factors that could cause actual results to differ materially from such forward-looking statements include, among others, the following:
• worldwide economic conditions;

• our ability to produce coal at existing and planned future operations;

• our ability to meet our projected cash requirements and factors related thereto;

• changes in postretirement medical benefit and pension obligations;

• availability and costs of credit, surety bonds and letters of credit;

• inability to expand coal operations due to limitations in obtaining bonding capacity to back new mining permits;

• our ability to maintain compliance with debt covenant and waiver agreement requirements or obtain waivers from our lenders in cases of non-compliance;

• the ability of our subsidiaries to pay dividends to the Parent due to restrictions in our debt arrangements and reductions in planned coal deliveries;

• our ability to negotiate profitable coal contracts, price reopeners and extensions;

• our ability to maintain satisfactory labor relations and to implement cost containment measures for labor-related obligations and the effect of employment cost containment measures on our expenses, liabilities, and cash outlays;

• financial stability of our customers, and their ability to continue to comply with their contractual commitments in a timely manner;

• disruptions in delivery or changes in pricing from third-party vendors of goods and services which are necessary for our operations, such as fuel, steel products, explosives and tires;

• the impact of unfavorable general economic and energy market conditions on our coal delivery and sales and our results of operations;

• impact of weather on demand, production and transportation;

• the performance of our Roanoke Valley power plants and the structure of its contracts with its lenders and Dominion Virginia Power;

• the coal's market share of electricity generation;

• the effect of prolonged maintenance or unplanned outages at our operations or those of our major power generating customers;

• the effect and timing of generator repairs made at our ROVA power plants;

• the effect that reductions in planned coal deliveries will have on our results of operations; and

• future legislation and changes in regulations, governmental policies and taxes, including those aimed at reducing emissions of elements such as mercury, sulfur dioxides, nitrogen oxides, particulate matter or greenhouse gases.

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WESTMORELAND COAL COMPANY AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONT.) As a result of the foregoing and other factors, no assurance can be given as to the future results and achievement of our goals. We undertake no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise. Overview
We are an energy company organized as a Delaware corporation in 1910. We mine coal, which is used to produce electric power, and we own power-generating plants.
We own five surface mines located in the United States, which supply coal to power plants. Several of these power plants are located adjacent to our mines, and we sell virtually all our coal under multi-year contracts. Due to the generally longer duration and terms of our contracts, we enjoy relatively stable demand compared to competitors who sell more of their production on the spot market and under short-term contracts.
Our Absaloka Mine is owned by our subsidiary, Westmoreland Resources, Inc., or WRI. The right to mine coal at our Absaloka Mine has been subleased to an affiliated entity whose operations we control. The Beulah, Jewett, Rosebud, and Savage Mines are owned through our subsidiary, Westmoreland Mining LLC, or WML. We sold 29.3 million tons of coal in 2008. We were the tenth largest coal producer in the United States, ranked by tons of coal mined in 2008. In addition to our mining operations, we own the Roanoke Valley power plants, or ROVA. ROVA consists of two coal-fired generating units with a total capacity of 230 megawatts. ROVA supplies power pursuant to long-term contracts. We are a holding company and conduct our operations through subsidiaries, which generally have obtained separate financing. As a holding company, we have significant cash requirements to fund our ongoing heritage health benefit costs, pension contributions, and corporate overhead expenses. The principal sources of cash flow to us are distributions from our principal operating subsidiaries. Each of WML, ROVA and WRI has a credit agreement that contains covenants applicable to that subsidiary. Only the WRI agreement permits dividends to be paid by WRI to us without restriction.
In the second and third quarter 2009, WML did not comply with a loan covenant in its debt agreement. On October 7, 2009, WML received a waiver from its lenders for the quarters ended June 30, 2009, and September 30, 2009, and for anticipated non-compliance at quarters ended December 31, 2009, and March 31, 2010, assuming it meets certain conditions. WRI also did not comply with a net worth covenant in its Business Loan Agreement in the third quarter of 2009. WRI was able to obtain a waiver on October 29, 2009, for the third quarter 2009. See Note 7 for additional details on these defaults.

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WESTMORELAND COAL COMPANY AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONT.) During the second quarter of 2009, unscheduled customer outages occurred after planned maintenance outages, which affected our Rosebud and Beulah Mines. The Beulah Mine customer ended its unscheduled outage and resumed coal deliveries in July 2009. However, deliveries to our Rosebud Mine's customer were significantly reduced through late October 2009 when operations resumed. During Rosebud's customer-scheduled maintenance outage in early 2009, it found unanticipated mechanical problems that required immediate replacement. The replacement parts were not successful in fixing the mechanical issues, further prolonging the maintenance outage at the power plant far beyond the initial estimates. The power plant outages at Beulah and Rosebud are referred to herein as "the customer outages." Additionally, due to unfavorable current economic and energy market conditions, our Absaloka and Jewett Mine's deliveries decreased and will expect to remain at reduced levels at least through the fourth quarter of 2009. These reductions in actual and planned 2009 deliveries will reduce dividends and cash flows available to us.
During the third quarter 2009, we froze one of our pension plans and eliminated postretirement medical benefits for our non-represented employees. See Note 9 for additional information.
In October 2009, during a planned major five-year maintenance outage at one of our ROVA power plants, we determined that an unexpected repair was needed on the generator rotor. This repair extended the outage and is expected to decrease revenues and operating income in the fourth quarter of 2009. We expect the repair to be made and operations to resume in November 2009.

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                   WESTMORELAND COAL COMPANY AND SUBSIDIARIES
        MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
                         RESULTS OF OPERATIONS (CONT.)
RESULTS OF OPERATIONS
Items that Affect Comparability of Results
For the three and nine months ended September 30, 2009 and 2008, our results
have included items that significantly affected net loss. The pretax income
(expense) components of these items were as follows (in thousands):

                                           Three Months Ended              Nine Months Ended
                                             September 30,                   September 30,
                                          2009            2008            2009           2008
Fair value adjustment on
derivatives and related
amortization of debt discount          $    1,216               -           5,191              -
Heritage legal claim settlement                 -               -             756              -
Interest expense attributable to
beneficial conversion feature                   -               -               -         (8,108 )
Loss on extinguishment of WML debt              -               -               -         (3,834 )
Coal royalty dispute settlement                 -          (2,635 )             -         (2,635 )
Loss on extinguishment of power
debt                                            -               -               -         (1,344 )
Restructuring charges                           -               -               -           (628 )
Gain on sale of interest in the Ft.
Lupton power project                            -             876               -            876

Total impact                           $    1,216          (1,759 )         5,947        (15,673 )

Items recorded in the nine months ended September 30, 2009
• We recorded income of $5.2 million following the adoption of ASC 815-40, Determining Whether an Instrument (or Embedded Feature) is Indexed to an Entity's Own Stock. This impact included $5.9 million of other income resulting from the mark-to-market accounting of the decrease in the value of the conversion feature in our convertible notes and a decrease in the value of our warrant, which was offset with $0.7 million of interest expense related to amortization of the debt discount recorded as a result of the valuation of the conversion feature.

• We recorded a gain of $0.8 million related to a settlement of past heritage claims, as a result of efforts to reduce our heritage costs.

Items recorded in the nine months ended September 30, 2008
• We recorded $8.1 million of interest expense related to the beneficial conversion feature in the convertible notes we issued in March 2008, as the conversion price was lower than the fair market value of our common stock at the time of issuance. We recorded an adjustment to our 2009 opening Accumulated deficit as part of our adoption of ASC 815-40, which reversed the impact of this expense through Accumulated deficit.

• We refinanced our WML debt and as a result recorded losses of $3.8 million for the extinguishment of debt.

• We recorded $2.6 million in net expense related to coal royalty claims as we reached an agreement with the U.S. Minerals Management Service and the Montana Department of Revenue to settle two long-standing disputes. This net expense included $10.1 million of revenue offset with $12.7 million of cost of sales.

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WESTMORELAND COAL COMPANY AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONT.) • We refinanced our power debt and as a result recorded losses of $1.3 million for the extinguishment of debt.

• In 2007, we initiated a restructuring plan in order to reduce the overall cost structure of the Company. As a result, in the first nine months of 2008 we recorded restructuring charges of $0.6 million. The restructuring charges related to termination benefits and outplacement costs.

• On July 2, 2008, we received $0.9 million for our royalty interest in the gas-fired Ft. Lupton project and recognized a gain of $0.9 million on the sale.

Quarter Ended September 30, 2009 Compared to Quarter Ended September 30, 2008 Summary
Our third quarter 2009 sales decreased to $112.4 million compared with $141.3 million in the third quarter of 2008. This decrease was primarily driven by a $25.6 million decrease in our coal segment revenues; which includes approximately $15.5 million as a result of the customer outages and unfavorable current energy market conditions, and approximately $10.1 million related to the settlement of coal royalty claims recorded in the third quarter of 2008. In addition, our power segment revenues decreased $3.3 million related to a decrease in megawatt hours sold.
Our third quarter 2009 net loss applicable to common shareholders increased to $12.4 million compared with a $3.5 million loss in the third quarter of 2008. Excluding the $1.2 million of third quarter 2009 income and the $1.8 million of third quarter 2008 expenses (discussed in Items that Affect Comparability of Our Results), our net loss increased by $11.9 million. The primary factors, in aggregate, driving this increase in net loss were:
• A $7.4 million decrease in our coal segment operating income. This decrease was primarily driven by reduced tonnages sold due to the customer outages and unfavorable current energy market conditions, and was partially offset by income from our Indian Coal Production Tax Credit monetization transaction. In addition, our coal segment operating loss includes losses from a partially owned consolidated subsidiary;

• A $5.0 million decrease in our power segment operating income resulting primarily from reduced megawatt hours sold and increased maintenance expenses as a result of a planned major five-year maintenance outage and unplanned outages occurring in the third quarter of 2009;

• A $1.4 million increase in net loss attributable to noncontrolling interest driven by losses from a partially owned consolidated subsidiary;

• A $1.3 million increase in heritage costs primarily driven by costs related to future cost containment efforts and unfavorable changes in the valuation of our Black lung benefits trust's assets and liabilities due to changes in interest rates;

• A $0.8 million decrease in other expense related to other-than-temporary impairment charges taken on our investments during the third quarter of 2008; and

• A $0.6 million decrease in interest income, which was partially offset with a $0.3 million decrease in interest expense as a result of debt refinancing.

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                   WESTMORELAND COAL COMPANY AND SUBSIDIARIES
        MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
                         RESULTS OF OPERATIONS (CONT.)
Coal Segment
The following table shows comparative coal revenues, operating income (loss) and
production, and percentage changes between periods:

                                                           Three Months Ended September 30,
                                                                                   Increase / (Decrease)
                                             2009               2008                 $                 %
                                                           (In thousands)
Revenues                                   $  91,708      $        117,288      $    (25,580 )         (21.8 )%
Operating income (loss)                          (78 )               4,680            (4,758 )        (101.7 )%
Tons sold - millions of equivalent tons          5.8                   7.8              (2.0 )         (25.6 )%

Our third quarter 2009 coal revenues decreased to $91.7 million, compared with $117.3 million in the third quarter of 2008. This decrease occurred primarily from a decrease of 2.0 million tons sold as a result of the customer outages and settlement of coal royalty claims recorded in the third quarter of 2008. Additionally, due to unfavorable current economic and energy market conditions, our Absaloka and Jewett Mine's deliveries decreased and will remain at reduced levels at least through the fourth quarter of 2009.
Our coal segment's operating loss was $0.1 million in the third quarter of 2009, compared to operating income of $4.7 million in the third quarter of 2008. Excluding the coal royalty dispute settlement of $2.6 million in the third quarter of 2008 (discussed in Items that Affect Comparability of Our Results), our coal segment operating income decreased by $7.4 million. Of this decrease, approximately $9.1 million was due to reduced tonnages sold as a result of the customer outages and unfavorable current economic and energy market conditions. This decrease was partially offset with approximately $1.7 million of earnings recognized from our Indian Coal Production Tax Credit monetization transaction. Power Segment
The following table shows comparative power revenues, operating income and production and percentage changes between periods:

                                             Three Months Ended September 30,
                                                                   Increase / (Decrease)
                                  2009            2008                $                %
                                             (In thousands)
  Revenues                      $ 20,696     $        24,017     $     (3,321 )       (13.8 )%
  Operating income                   680               6,599           (5,919 )       (89.7 )%
  Megawatts hours - thousands        389                 441              (52 )       (11.8 )%

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WESTMORELAND COAL COMPANY AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONT.) Our third quarter 2009 power segment revenues decreased to $20.7 million compared to $24.0 million in the third quarter 2008. This decrease is primarily from decreased megawatt hours sold as a result of a planned major five-year maintenance outage and unplanned outages occurring in the third quarter of 2009. Our power segment's operating income decreased to $0.7 million in the third quarter of 2009 compared to $6.6 million in the third quarter of 2008. Excluding the gain on sale of interest in the Ft. Lupton power project of $0.9 million in the third quarter of 2008 (discussed in Items that Affect Comparability of Our Results), our power segment operating income decreased by $5.0 million. This decrease was primarily from reduced megawatt hours sold and increased maintenance expenses as a result of a planned major five-year maintenance outage and unplanned outages occurring in the third quarter of 2009.
In October 2009 during a planned major five-year maintenance outage at one of our ROVA power plants, we determined that an unexpected repair was needed on the generator rotor. This repair extended the outage and is expected to decrease revenues and operating income in the fourth quarter of 2009. We expect the repair to be made and operations to resume in November 2009. Heritage Segment
The following table shows comparative detail of the heritage segment's operating expenses and percentage changes between periods:

                                                           Three Months Ended September 30,
                                                                                   Increase / (Decrease)
                                             2009               2008                 $                %
                                                           (In thousands)
Health care benefits                      $    5,777      $          5,941      $      (164 )           (2.8 )%
Combined benefit fund payments                   802                   880              (78 )           (8.9 )%
Workers' compensation benefits                   146                   145                1              0.7 %
Black lung benefits                              713                  (307 )          1,020            332.2 %

Total heritage health benefit expenses         7,438                 6,659              779             11.7 %
Selling and administrative costs                 857                   304              553            181.9 %
Heritage segment operating loss           $    8,295      $          6,963      $     1,332             19.1 %

Our third quarter 2009 heritage operating expenses were $8.3 million compared to $7.0 million in the third quarter of 2008. This increase of $1.3 million was primarily driven by costs related to containment efforts and unfavorable changes in the valuation of our Black lung benefits trust's assets and liabilities due to changes in interest rates. These increases were partially offset with favorable health care benefit experience.
During the third quarter 2009, we eliminated postretirement medical benefits for our non-represented employees. See Note 9 for additional information. We continue to explore and pursue efforts towards the reduction, as well as, elimination of portions of our heritage health benefit costs.

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WESTMORELAND COAL COMPANY AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONT.) Corporate Segment
Our corporate segment's operating expenses of $2.0 million in the third quarter of 2009 remained virtually unchanged from the third quarter of 2008. Other income (expense)
Our third quarter 2009 other expense decreased to $3.4 million compared with $5.3 million of expense in the third quarter of 2008. Excluding the $1.2 million impact of the fair value adjustment on derivatives and related amortization of debt discount, (discussed in Items that Affect Comparability of Our Results), our other expense decreased $0.7 million primarily due to other-than-temporary impairment charges taken on our investments during the third quarter of 2008. Nine Months Ended September 30, 2009 Compared to Nine Months Ended September 30, 2008
Summary
Our sales for the first nine months of 2009 decreased to $339.0 million compared with $386.3 million in the first nine months of 2008. This decrease was primarily driven by a $45.2 million decrease in our coal segment revenues, which includes approximately $35.1 million as a result of the customer outages and unfavorable current energy market conditions and approximately $10.1 million related to the settlement of coal royalty claims recorded in the third quarter of 2008. In addition, our power segment revenues decreased $2.1 million related to a decrease in megawatt hours sold.
Our net loss applicable to common shareholders for the first nine months of 2009 decreased to $26.4 million compared with a $33.2 million loss in the first nine months of 2008. Excluding $5.9 million of income in the first nine months of 2009 and the $15.7 million of expenses from items in the first nine months of 2008 (discussed in Items that Affect Comparability of Our Results), our net loss increased by $14.8 million. The primary factors, in aggregate, driving this increase in net loss were:
• A $14.2 million decrease in our coal segment operating income. This decrease was primarily driven by reduced tonnages sold due to the customer outages and unfavorable current energy market conditions, and was partially offset by income from our Indian Coal Production Tax Credit monetization transaction. In addition, our coal segment operating income includes losses from a partially owned consolidated subsidiary;

• A $5.1 million decrease in our power segment operating income resulting primarily from reduced megawatt hours sold and increased maintenance expenses as a result of a planned major five-year maintenance outage and unplanned outages;

• A $4.4 million increase in net loss attributable to noncontrolling interest driven by losses from a partially owned consolidated subsidiary;

• A $2.5 million decrease in our corporate expenses related to cost control efforts and a reduction in our stock compensation expense;

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WESTMORELAND COAL COMPANY AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONT.) • A $2.3 million increase in heritage costs primarily driven by costs related to future cost containment efforts and unfavorable changes in the valuation of our Black Lung benefit's trust assets and liabilities due to changes in interest rates;

• A $1.5 million decrease in interest income, which was partially offset with a $0.9 million decrease in interest expense as a result of debt refinancing;

• A $0.4 million decrease in other expense related to other-than-temporary impairment charges taken on our investments; and

• A $0.1 million decrease in income taxes related to lower state taxable income primarily driven by the customer outages.

Coal Segment
The following table shows comparative coal revenues, operating income and
production, and percentage changes between periods:

                                                            Nine Months Ended September 30,
                                                                                    Increase / (Decrease)
                                             2009               2008                  $                 %
                                                           (In thousands)
Revenues                                   $ 272,891      $        318,102      $     (45,211 )         (14.2 )%
Operating income                               1,674                13,122            (11,448 )         (87.2 )%
Tons sold - millions of equivalent tons         17.6                  21.8               (4.2 )         (19.3 )%

Our coal revenues for the first nine months of 2009 decreased to $272.9 million, . . .